If this keeps up, investment bankers may need to run ads like realtors – those ones that feature some sap of a buyer who cheaps out on a broker and ends up facing lawsuits, termites and nudist neighbours for having gone it alone.
As if a drought of mergers and acquisitions is not hard enough on the financial advisory business, the biggest deal involving a Canadian company in 10 months just hit the headlines and no Canadian investment banking firms were involved.
In fact, Valeant Pharmaceuticals International Inc. used no investment bankers at all for its $8.7-billion (U.S.) agreement to buy eye care company Bausch & Lomb Inc. The company did use lawyers, hiring Skadden Arps Slate Meagher & Flom LLP in the U.S. and Osler Hoskin & Harcourt LLP in Canada. The seller used lawyers and two U.S. banks.
But on the financial side, Valeant has decided to take its mergers and acquisitions work in-house, saving many millions of dollars. Given the number of deals Valeant does, the savings add up fast.
There is no rule that says you need a banker, just as there is no rule that says you need a realtor. Most companies still use bankers. But Valeant is hardly alone.
Exxon Mobil Corp. used no financial advisers when it agreed in October to buy Calgary-based Celtic Exploration in a $2.9-billion transaction. Celtic hired two banks, RBC Dominion Securities and FirstEnergy Capital Corp., but only for fairness opinions rather than a full (and more costly) financial advisory mandate.
In technology, do-it-yourself M&A is quite common. Constellation Software, Canada's busiest acquirer in the past year, does M&A work in-house. Research In Motion Ltd. has also sometimes eschewed bankers.
On the Valeant deal, Goldman Sachs & Co. and JPMorgan Securities LLC advised Bausch & Lomb, which is owned by private equity investors. Valeant is using financing from Goldman, and it plans to raise equity at some point, which will mean hiring bankers as underwriters.
But as for doing the actual work on the purchase, Valeant's view is that deals are not that hard, and finding them and executing them is part of the job for executives running business lines.
"We have always maintained business development is the role of line management," Michael Pearson, chief executive officer of Valeant, told The Globe and Mail's Sean Silcoff. "The deals are not that complicated."
Where a banker can come in handy is if there is litigation, with shareholders suing a board because of a deal gone wrong. Hiring a banker and getting a fairness opinion might make it easier to say to a judge that all the proper boxes were ticked in the process of doing the transaction. However such suits are rare.
"It's up to each board, a particularly of a public company, as to whether or not they want the comfort of a fairness opinion," said Gary Girvan, a senior partner at McCarthy Tétrault LLP who specializes in mergers and acquisitions for public companies. "There's no case I could point to where a board has been sued for not obtaining a fairness opinion. It's not legally mandatory, but is usually seen as an important element of the process."
A fairness opinion or other financial advisory work can add significant costs, especially as a percentage of the value of a smaller deal.
Mr. Girvan has had to counsel boards that are reluctant to hire a financial adviser. He said that after he gives the "lay of the land, most boards will obtain a fairness opinion."
In the case of Valeant, the company has a Goldman Sachs banker in its corner already. Howard Schiller, the company's chief financial officer, was one of the top executives in Goldman's investment banking division before retiring. He ran Goldman's global mergers business for two years, and oversaw the health care and consumer products groups in the investment banking division.
Given the kind of fees that Valeant would have paid to a financial adviser on an $8.7-billion transaction, which would have run to tens of millions of dollars, Mr. Schiller's $6.7-million in compensation last year starts to look like a bargain.
Mr. Pearson was a consultant to the pharmaceutical industry before becoming CEO, so he also brings knowledge of how to do deals. At McKinsey, one of his jobs was head of the global pharmaceuticals practice.
The company's deal team includes the CEO, the CFO and "a couple of other people," Mr. Pearson said. "We draw on our finance team. We draw on the organization. We don't build a big, separate business development capability."
(Boyd Erman is a Globe and Mail Reporter & Streetwise Columnist.)
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